Are you someone who has recently been interested in stocks and other exchanges but is entirely new to this world of stocks and trades? Well, then, we are sure that as a newcomer or someone who was an outsider up until recently, you may be having a hard time getting a grasp on the multiple complex terms that arise in this area of operation, right?

Suppose one such term you came across is the Dow Jones Industrial Average (DJIA), and you hopped onto the web to gain a better understanding of what the Dow Jones Industrial Average (DJIA) is and why it is an essential aspect of the stock market. In that case, you have landed on the right page. Hop on below to learn what the Dow Jones Industrial Average (DJIA) is and other related information that you should know about it.

What Is the Dow Jones Industrial Average (DJIA)?

When the investors within the stock market want to know the ongoing operation of the stock market or how it is doing, they then turn towards the stock indexes like the Dow Jones Industrial Averages (DIJA), which help them gain a clear picture of it.

Commonly known as ‘the Dow,’ this average determinant is a collection of 30 blue chip American companies which, when taken together, can quickly provide a quick snapshot of the overall stock market operations. How do they do this?

Well, when on the charts, the Dow ends the trading day on a higher note, investors take that to mean the overall market is going up. One day, when this tangent is on a lower scale, it simply means that the market is going down.

Dow is a price-weighted index, which clearly means that each component in the company is weighted based on the share price it holds. Hence, the higher-priced companies tend to have a larger weight compared to companies that fall on a lower price.

History of the Dow Jones Industrial Average

Now that you understand what the Dow Jones Industrial Average (DJIA) is, we are sure you must be thinking of its occurrence or how it started, right? Well, the Dow is one of the oldest stock market indexes that are currently in operation. It was created in 1896 by Charles Dow – who is also the founder of the Wall Street Journal – and was named partly in his honor, too.

The ‘Jones’ part of the name is derived from the newspaper’s co-founder along with Dow, Edward Jones, who worked as a statistician. Initially, this Dow index only had 12 stocks on the list and was average-weighted – to find out its average. All one had to do was add up the share prices of the 12 companies and then divide it by 12. However, the list has grown since then. Today, the Dow Jones Industrial Average (DJIA) index is maintained by the S&P Dow Jones Indices.

Why is the Dow Jones Industrial Average (DJIA) Important, and what are its Criticisms?

We are sure you must be wondering what makes the Dow Jones Industrial Average (DJIA) so important when there are so many other indexes in the stock market. If this is the case, then read it for yourself:

Why is it Important?

The Dow Jones Industrial Average (DJIA) index is currently made up of 30 of the largest publicly traded companies in the United States. It is undeniably one of the most well-known market indicators.

Stock indexes like the Dow are some of the most essential proxies that are available for the New York Stock Exchange, and you will often have to hear about them on the news as well.

These stock indexes efficiently provide a quick overview of the total performance of the stock market for that current day on a daily basis. Moreover, the Dow Jones Industrial Average (DJIA) is also known as a benchmark index for the U.S. blue-chip stocks in particular.

What is the Criticism About Dow?

While the Dow Jones Industrial Average (DJIA) does have exceptional benefits and reasons that make it one of the best-measuring indexes in the stock markets, we cannot deny that, like many other index measures, this one does hold a few criticisms to its name, too. Want to know what these criticisms are?

Well, many people believe that since the Dow Jones Industrial Average (DJIA) only consists of 30 companies, it is not an adequate representation of the overall stock market at large. The fact that it also ignores the market cap is one more reason why many analysts favor the S&P 500 over the stock market benchmark.

How is the Dow Jones Industrial Average Calculated?

Calculating the Dow Jones Industrial Average (DJIA) is no complicated job. All you will have to do is simply add the prices of the 30 stocks that are present on this index and then move on to divide the sum of these indexes by the Dow Divisor – a numeral that factors in stock splits and dividends. The Dow Divisor is a universal way through which any analyst or person can understand the impact or effect of a one-point move in any of the 30 stocks that make the Dow.

However, what you need to understand is that the Dow Divisor changes frequently and is maintained by the Dow Jones Indices. Hence, it is always essential to look up the current Divisor before making any calculations.

Wrapping Up!

Understanding the essential terms of the stock market and other related aspects of it is crucial. If you are someone who was searching the web for essential insights and other information on the Dow Jones Industrial Average (DJIA), then we hope this article was helpful for you. If you have a good understanding of the stock market, add your knowledge related to this topic for our other users to benefit from.